Bankers Pessimistic About Future of Mortgage Delinquencies

Press Release - July 12, 2011, 10:00 a.m. EDT

INNEAPOLIS, Jul 12, 2011 (BUSINESS WIRE) -- Key findings in FICO's Quarterly Survey of Bank Risk Professionals offered mixed signals about the outlook for the U.S. economy, with bankers remaining optimistic about the financial health of consumers but indicating that the "credit gap" for small businesses will grow, and expressing concern about residential mortgage foreclosures. The survey was conducted for FICO FICO -0.86% by the Professional Risk Managers' International Association (PRMIA). The survey results were analyzed by the Columbia Business School.

Consumer delinquencies expected to continue downward In a sign that bankers are cautiously optimistic about the strength of U.S. consumers, 38 percent of survey respondents expected credit card delinquencies to remain flat, while 31 percent expected them to fall, and only 30 percent expected them to rise over the next six months. For car loans, 47 percent expected delinquencies to remain flat, 32 expected them to fall, and 21 percent expected them to rise over the next six months.

"Bankers tend to be a conservative group, so the fact that their positive outlook from Q1 carried over to Q2 is a good sign," said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs. "Although some consumers continue to struggle with debt, credit usage is under control at an aggregate level. Credit card delinquencies and charge-offs are at pre-recession levels."

Troubling signs for small businesses and homeowners Despite the somewhat positive outlook for consumer health, the survey results weren't all positive. While 28 percent of respondents expected delinquencies on small business loans to decline over the next six months, 33 percent expected the number to rise. That is a reversal of last quarter's survey results when a plurality of bankers expected delinquencies to drop. Moreover, 74 percent of respondents expected credit demand to increase among small businesses. Only 46 percent expected credit supply to increase, meaning bankers expected credit to remain tight for small business owners.

Another area of pessimism among U.S. bankers continues to be housing. While 18 percent of respondents expected mortgage delinquencies to decline over the next six months, 46 percent expected the number to rise. Similarly, 22 percent of bankers surveyed expected delinquencies on home equity lines to decline while 46 percent expected delinquencies to rise. Similar results were reported in the European survey.

"This isn't surprising given the fact that average home equity in the U.S. has dropped from 61 percent in 2001 to 38 percent today," said Jennings. "With millions of homeowners under water on their mortgages, it is very hard to see the light at the end of the tunnel. It is likely to take years to work through all the troubled mortgages."

Credit usage expected to rise Americans still appear to have an appetite for credit -- 47 percent of survey respondents expected credit card balances to increase over the next six months, while 19 percent expected balances to decrease. The balance increases are likely to be driven by higher spending among some consumers and smaller monthly payments from others.

SOURCE: FICO